Covenant
A covenant is a condition a lender attaches to a loan or , requiring the borrower to maintain certain financial standards for as long as the debt is outstanding, often a maximum ratio or a minimum level of cash flow relative to its debt payments.
Breaching a covenant can trigger default even if every payment has been made on time, giving the lender the right to demand immediate repayment or renegotiate terms. This is why a company's debt load matters beyond simply whether it can afford the interest, the conditions attached to that debt carry real consequences of their own.
Covenants exist to protect the lender, but they also constrain the borrower's flexibility. A company operating close to a covenant limit has less room to weather a bad year without triggering a technical default, even one it could otherwise easily afford to work through.